November 13, 2009
Do you like the federal Flexible Spending Account program, but not its "use-it-or-lose-it" aspect and all the pre-planning that requires? If you are looking for a tax shelter and you're in relatively good health, you might consider a high-deductible health plan this open season. When using an HDHP with a Health Savings Account, you can shelter up to $7,150 per year tax free. Plus, when you use it for health care expenses, withdrawals also are tax-free.
The confusing thing to me is why more employees aren't choosing this kind of coverage. According to the Office of Personnel Management, of the 2.2 million Federal Employees Health Benefits Program policyholders, 71 percent are in preferred provider organization plans. Another 27 percent are in health maintenance organizations, while only 2 percent are in consumer-directed health plans and HDHPs.
What You Get
Here's what you get if you join an HDHP:
- Health insurance that offers either coverage similar to an HMO (under which you must use providers that are part of the plan's network) or a PPO (allowing coverage outside the network for a higher out-of-pocket expense).
- Catastrophic protection. There are limits on your total out-of-pocket annual expenses, as there are with other FEHBP plans. HDHP limits can be higher than traditional health plans, but the extra cost can be offset by the tax savings.
- Preventative care at no out-of-pocket expense.
- Less expensive premiums than traditional insurance.
HSA or HRA?
HDHPs are paired with either health savings accounts or health reimbursement arrangements. Let's look at how they compare.
Health Savings Account:
- HSAs provide tax advantages. In 2010, tax-sheltered contributions to an HSA will be allowed up to $3,050 for an individual and $6,150 for a family.
- Both you and your health plan contribute to the account. The plan's contribution is called a "premium pass-through," meaning that part of the cost of your health insurance is contributed to your HSA. If you are 55 or older you can make additional catch-up contributions up to a maximum of $1,000.
- The money in your HSA is invested in a bank account in your name and will earn tax-free interest. All your contributions are tax-deductible.
- You can contribute directly from your paycheck by payroll deductions, in which case the contributions will be made on a pretax basis.
- The withdrawals you make to cover your health care expenses are tax-free.
- The money in your account will accumulate from year to year.
- The account is portable and the funds are yours to keep even when you leave federal service or retire.
- The money you contribute is available immediately. The premium pass-through payments generally are made monthly to your HSA account.
- When you enroll in Medicare you no longer can contribute to an HSA, but you can use the funds that have accumulated to pay for Medicare Part B premiums and other medical expenses.
- You also can use the funds to pay for a limited amount of long-term care insurance premiums. (See IRS Publication 502).
- You can establish a limited expense health FSA, allowing you to set aside $250 to $5,000 per benefit period for dental and vision expenses, instead of paying those expenses from your HSA.
- The funds in your HSA can be used for nonmedical expenses, but such withdrawals are taxable -- and if made before you're 65, are subject to a 10 percent income tax penalty. The funds are payable to your beneficiary upon your death.
Health Reimbursement Arrangement:
- If you have other health insurance or are enrolled in Medicare or TRICARE, you might not have an HSA, but your HDHP will provide an HRA.
- You still will be entitled to the annual credit in the same amount as the premium pass-through of an HSA. This credit generally is funded at the beginning of the year.
- Unused credits carry over from year to year.
- These accounts do not earn interest and are forfeited if you leave federal service or change health plans.
- You can still participate in an FSA if you are eligible for one.
For More Information
How do high-deductible health plans stack up against traditional FEHBP plans? The Office of Personnel Management offers a comparison tool.
To learn more about HDHPs, check out the following resources:
If you already are enrolled in an HDHP, I think your fellow readers would be interested in your thoughts about how it's working for you. Please share your experience in the comment area below. Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.
For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.
November 13, 2009